One of the first lessons most self-supporting labor class adults learn in life is the importance of vigilantly cleaning up after oneself; after all, once you're out on your own in the world, nobody is going to do it for you. For most of us, the apathy, inattentiveness and delay of today, will invariably come back to bite us in the backside tomorrow - and I'm as much a prisoner of this reality as anyone else who actually works for a living. Thus after procrastinating for the first three weeks of May, I finally paid the piper and spent most of this past weekend doing a little housekeeping; both in a very literal sense, and in terms of getting some long-brewing observations and criticisms off my chest over on my Patreon blog. During that time, I also wrapped up my six part look at Matt Taibbi's 2010 anti-Wall Street masterpiece "Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History“ - you can find that article (and links to the previous five installments) here.
I mention this now because throughout all of my writing about Griftopia, I've consciously attempted to highlight what I feel is the enduring takeaway from the book: the persistent culture of overt criminality in the global financial industry and the complicity of bought-and-paid-for gate guardians who continue to enable that criminality. Although it is not commonly understood, the truth is that decades of deregulation, state-subsidized conglomeration and the absolute dominance of American financial institutions have turned the entire global economy into a sort of ponzi scheme - a rigged game where market profits are privatized, while the losses are passed on to the people in a system that serves to funnel untold trillions of dollars from public coffers directly into the pockets of elite investors and banking institutions. Once you understand this you start to see the 2008 financial crisis for what it truly was; not a "thousand year flood" but rather a predictable (and reoccurring) side effect of allowing largely unaccountable mega-banks to gamble freely with other people's money.
In other words - it's not really a question of "if" there will be another financial crisis, by rather a question of when the bubble is going to pop and precisely who will be holding the bag when it comes time to pay off Wall Street's gambling debts. That's why stories like this May 15, 2019 piece by Pam and Russ Martens over at Wall Street on Parade should gravely concern you:
JPMorgan Chase Owns $2.2 Trillion in Stock Derivatives; Two-Thirds the Total for All Banks
I'm sorry; did I accidentally say this article should merely concern you? As it turns out, that was a grossly negligent understatement - what I meant is that this article should scare the living sh*t out of you. Unfortunately because it's written by financial industry observers for an audience of banking scandal junkies who're extremely plugged into "the Street" it may not be readily apparent to the casual observer why all of this is extremely bad. Let's look at some individual quotes from the article which I'll try to place in context, before looking to sum up the situation in layman's terms at the end:
"According to the Office of the Comptroller of the Currency (OCC), the regulator of national banks, as of December 31, 2018 JPMorgan Chase Bank NA (the Federally-insured bank backstopped by U.S. taxpayers) held $2,212,311,000,000 ($2.2 trillion) in equity derivatives. Equity is another name for stock. The OCC also reported that all commercial banks in the U.S. held a total of $3.374 trillion in equity derivatives at the end of last year, meaning that for some very strange reason, JPMorgan Chase holds a 65.5 percent market share of bank trading in this derivatives market.
Those trillion dollar figures are notional amounts, meaning the face value. The OCC defines “notional” like this: “The notional amount of a derivative contract is a reference amount that determines contractual payments, but it is generally not an amount at risk. The credit risk in a derivative contract is a function of a number of variables, such as whether counterparties exchange notional principal, the volatility of the underlying market factors…, the maturity and liquidity of the contract, and the creditworthiness of the counterparty.”
Translation: one of the largest banks on the planet has 2.2 trillion dollars worth of potentially sketchy stock derivatives parked in its regular banking portfolio; effectively meaning JPMorgan Chase is gambling with a metric f*ck ton of money that's insured by the U.S. government. This is not an auspicious start, but onward we go:
"According to the OCC report, JPMorgan Chase lost $644 million on its equity positions in the fourth quarter of 2018. We don’t yet know what happened in the first quarter of this year because the OCC has not yet released its report.
Not only is JPMorgan Chase Bank NA engaging in risky stock derivative trades, but according to the OCC just 31 percent of these trades are centrally cleared. The other 69 percent are what are called over-the-counter or OTC derivative trades, meaning they are “bilateral,” or secret contracts between JPMorgan Chase and a counterparty with little daylight available to Federal regulators. That also would suggest that they are highly illiquid."
Here we discover three things; the massively overexposed bank is in fact already losing a significant amount of money on these risky wagers, the majority of these trades are being conducted with zero regulatory oversight and there's good reason to believe the underlying stock derivatives themselves are junk. This is all starting to feel a little familiar:
"At this point, we should pause for a moment to explain what a “derivative” actually is. The OCC defines it this way: “A financial contract in which the value is derived from the performance of underlying market factors, such as interest rates, currency exchange rates, commodity, credit, and equity prices.”
Another definition of a derivative might be this: a type of trade where Wall Street mega banks, with far superior market knowledge from trillions of bits of internal trading data, can sell sh**t packaged as a solid investment to the dumb tourists who manage public pensions, municipal funds, and school district bond issuance, to name just a few. We apologize for the pejorative “dumb tourist,” but compared to the Ph.D. computer geeks, artificial intelligence software, and algorithmic trading that dominate Wall Street trading floors, we’re all dumb tourists. (See JPMorgan Employs 30,000 Programmers.)"
Yeap, the derivatives are dogsh*t and to make matters worse, these risky bets are almost certainly being pushed on small time institutional investors who represent cities, towns, school districts and working class retirees or hopeful retirees. If this isn't at least starting to give you a sense of déjà vu, you certainly haven't been clicking on the links as we go.
As bad as all of that is however, we're still looking at a situation which is merely alarming, predatory and immoral. Sure, JPMorgan Chase has accepted $2.2 trillion worth of obfuscated, unregulated and absurdly complex wagers on volatile stock markets through a bank that's backed up by public funds. Yes, the bank has packaged those bets into an undesirable investment vehicle to theoretically offset a potential loss. Yes, these risky derivatives are crappy and yes, it's objectively sh*tty that Jamie Dimon is pawning them off on complicit yokel government administrators and pension fund managers whose clients likely believe their investments are much safer than they are. So far, that's a pretty sad story for working class retirees but it hardly rates as "iceberg ahead" for the global economy. For things to get really out of hand here, the bigwigs at JPMorgan Chase would have to be making uniquely awful, insanely risky bets that are going to explode long before they can pass the risk on to children and the elderly. What are the odds of that eerily familiar situation coming up again this time? Let's turn back to the article and find out.
At this point in the piece, the authors go into a thorough discussion about the 2012 "London Whale scandal" which is certainly worth reading in its own right. This is however a recap, not a reprint so I'll just sum up the important things you need to know here: several years after the financial crisis, this exact same bank, with this exact same CEO, "was caught trading exotic derivatives in London to the tune of hundreds
of billions of dollars and ended up losing at least $6.2 billion of
depositors’ money." The bank (including Jamie Dimon) also appear to have engaged in a little "open fraud" in an effort to cover up their massive losses; all of which earned JPMorgan Chase a $920 million fine in the fall of 2013. How bad was it? From the article:
"Senator Carl Levin, who chaired the Senate Permanent Subcommittee on Investigations at the time, said JPMorgan Chase “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public. (Is that really a bank you want involved in $2.2 trillion of stock derivatives, 69 percent of which are shrouded in darkness?)”
Well isn't that just lovely? In answer to the author's above question, no that is almost certainly not the type of trading you want the largest federally insured bank in America conducting; especially in light of their objectively criminal history and the laughably permissible regulatory environment Wall Street is operating in under the Trump administration.
Naturally, this terrifying story gets even worse the further you dig:
"Now that Wall Street banks have a deregulatory regime in the White House, it is only natural to wonder if the cowboys are back in charge of trading at JPMorgan Chase. On that point, the OCC reports that at the height of the financial crisis in the fourth quarter of 2008, equity derivative contracts held by commercial banks totaled just $737 billion, or just 22 percent of the $3.374 trillion today, of which JPMorgan controls two-thirds."
Excellent, so that means the problem is almost certainly more than big enough to sink the entire global economy and absolutely nobody in a position to do anything about it gives a flying f*ck! Don't run away just yet my friends, because the good times just keep on rolling here:
"Adding to the concerns of what’s going on at JPMorgan Chase, is the question as to why the bank isn’t using the multitude of exchange-traded products available to take positions in the stock market, like the popular and liquid futures contract on the Standard and Poor’s 500 index, and why it isn’t making the trades in its investment bank instead of its Federally-insured commercial bank.
The troublesome answer is likely contained in this article at Risk.net which names JPMorgan the “equity derivatives house of the year.” If you read the article to the end, it becomes clear that JPMorgan Chase is customizing (known as “bespoke” contracts) equity derivatives in large amounts and with highly complex terms."
So you caught that right? The largest, most corrupt and "too big to fail" bank in America is almost certainly running massive, volatile, absurdly complex and largely unsupervised "prop bets" on the stock market through its federally insured depository arm, precisely because they're mindbogglingly risky investments. If the bank's "bespoke" wagers pay then the profits go to Jamie Dimon's investors; if on the other hand they bust, then potentially everyone on the planet loses - that is, everyone except the folks at JPMorgan Chase who custom built this financial time bomb in the first place.
Of course, the really f*cked up part about all of this is the fact that playing Russian roulette with the global economy because it'll be pensioners and the public treasury that eats the bullet if you lose, probably isn't illegal - and if it is illegal, you can be damn sure nobody is ever going to jail for it regardless.
Then again maybe I'm wrong; maybe the real icing on this whole sh*tcake is the fact that the US corporate media apparently doesn't consider this stupefyingly awful news even worthy of a blog post. I guess when it comes to screwing over the proles for fun and profit, corporate America really is as "thick as thieves."
- Nina Illingworth
Independent writer, critic and analyst with a left focus.
You can find my work at ninaillingworth.com, Can’t You Read, Media Madness and my Patreon Blog.
Updates available on Twitter and Facebook.
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